NATIONAL FUEL GAS CO annual report, FY2015

Business context and reporting period

National Fuel Gas Company’s Form 10-K covers the fiscal year ended September 30, 2015. The company operates five reported segments—Exploration and Production, Pipeline and Storage, Gathering, Utility, and Energy Marketing—with integrated assets concentrated in western New York and Pennsylvania and oil production also in California.

Financial performance and position

FY 2015 included $1.126 billion of non-cash oil and gas property impairment charges, or $650.2 million after tax. Excluding this unusual charge, the filing does not present a single adjusted earnings measure. Operating margin was severely affected by the impairment; the filing does not provide a clear comparable normalized margin.

• Segment net income (loss): Exploration and Production $(557.0) million; Pipeline and Storage $80.4 million; Gathering $31.8 million; Utility $63.3 million; Energy Marketing $7.8 million.
• At September 30, 2015, total assets were $6.702 billion, shareholders’ equity $2.025 billion, and long-term debt net of issuance costs $2.084 billion. Cash was $113.6 million; there was no short-term bank debt or commercial paper outstanding.
• The company reported a 0.51 debt-to-capitalization ratio under its credit agreement. Available committed revolving facilities totaled $1.25 billion; none was drawn at year-end.
• Dividends declared were $1.56 per share for the year; dividends paid totaled $130.7 million.

Material changes versus prior period

• Revenue fell about 17% year over year, while earnings swung from profit to loss, primarily because of the oil and gas impairments following lower commodity prices.
• Exploration and Production revenue declined to $693.4 million from $804.1 million. Weighted average realized gas price after hedging declined to $3.38/Mcf from $3.56; oil price after hedging fell to $70.36/barrel from $95.55.
• Pipeline and Storage earnings increased to $80.4 million from $77.6 million, supported by expansion-related transportation revenue. Gathering earnings declined slightly to $31.8 million from $32.7 million.
• Utility earnings were nearly flat at $63.3 million versus $64.1 million; Energy Marketing earnings rose to $7.8 million from $6.6 million.
• Cash from operations decreased $55.8 million, while capital expenditures rose to $1.018 billion. The company issued $450 million of 5.20% notes due 2025 and used proceeds for general corporate purposes, including reducing short-term debt.
• For the September 2015 quarter, revenue was $301.1 million and net loss was $187.7 million, including a $417.2 million pretax impairment charge.

Outlook, commentary, risks and contingencies

• Management expected another significant ceiling-test impairment in the first quarter of FY 2016, with further charges possible depending on commodity prices. Additional impairments could extend the restriction on issuing incremental long-term debt into FY 2017; replacement of maturing debt remains permitted.
• FY 2016 estimated capital expenditures were $1.190 billion: $425 million Exploration and Production, $525 million Pipeline and Storage, $140 million Gathering, and $100 million Utility. Appalachian production was forecast at 141–211 Bcfe, compared with 137 Bcfe in FY 2015.
• Management cited low oil and gas prices, regional price differentials, production curtailments, reserve-estimate uncertainty, and financing constraints as important risks. Other risks include pipeline project approvals and construction, environmental and hydraulic-fracturing regulation, safety incidents, weather, counterparty performance, and cybersecurity.
• Supply Corporation’s FERC settlement, approved November 13, 2015, provided for 2% reductions in maximum rates on November 1, 2015 and another 2% on November 1, 2016, while extending the rate-case timing. New York utility settlement discussions were ongoing.
• Environmental remediation liabilities were estimated at $11.2 million, including a $9.9 million estimate for a former manufactured-gas-plant site; the company expected recovery through rates over approximately 12 years. Other ordinary-course litigation and regulatory matters had no estimable loss range in the filing.
• The independent auditor gave an unqualified opinion on the financial statements and assessed internal control over financial reporting as effective.

Investor verification priorities

1. Track actual commodity prices and subsequent ceiling-test impairments against management’s FY 2016 expectations.
2. Review liquidity, credit-agreement capacity, debt covenants, ratings, and the duration and consequences of the long-term debt issuance restriction.
3. Compare actual Appalachian production, realized prices after hedging, and capital spending with the stated outlook.
4. Monitor completion, cost, permitting, and shipper commitments for major pipeline and gathering projects, particularly Northern Access 2016.
5. Check subsequent regulatory decisions, environmental remediation estimates, and any material developments in litigation or other contingencies.